Reading Elizabeth Warren’s Healthcare Plan, Part 2

I took a week off to celebrate Christmas with my family, and now I’m back for my assessment of the extensive quotes from Elizabeth Warren’s website that I shared in Part 1.

Reading through it all, I think it can naturally divide into three sections:

  1. General details that will apply regardless of how close she gets to achieving Medicare for All (M4A)
  2. Her plan to transition to M4A
  3. Her vision of what M4A would look like if it is achieved

In each section, I will not rehash every single detail she gives, but I will mention the things that I believe are the most relevant to the performance of the healthcare system as she would have it.

This was originally going to just be a two-part series, but shorter posts are less daunting to read, so I’ll tackle this in bite-size chunks. Therefore, I’ll start working my way through the main categories I’ve identified in Section 1, starting with . . .

Pharmaceutical Prices

She is going to crack down hard on medication prices. How? By getting Medicare to aggressively negotiate for all drug prices. The bargaining power of Medicare will increase as it covers more people, so this will become more effective at lowering prices over time. Eventually Medicare will not allow prices more than 110% of average international market prices, and there will be no artificial price floor for how low those prices can end up. If drug companies play hardball and refuse to agree to the prices Medicare is demanding, she will resort to regulatory mechanisms to bypass drug patents and require re-licensing of those drugs. Or if all that fails, she will just have HHS manufacture the drug itself if it finds a way to legally do so. She also promises to incentivize pharmaceutical companies to develop new drugs that we need (antibiotics, cancer drugs, vaccines).

My assessment: I agree that Medicare should negotiate for drug prices just like other insurers do all over the world. But I have concerns with her contingency plans if those negotiations have unsatisfactory results. If the prices are too high, that’s either because the pharmaceutical company has the power in the negotiation because they have a patent-induced monopoly (which we give them on purpose so they can reap the benefits of their investments), or it’s from a failure in the generic market.

If she doesn’t like patents, she should shorten them or change them in some other way. Don’t just override them–all that will do is create significant uncertainty about the potential rewards for major research investments, which will reduce how much pharmaceutical companies will be willing to invest, especially in certain areas, and it will distort the market, probably in undesirable ways.

If there’s a failure in the generic market, maybe she should find out what’s causing that failure. Business strategy history shows a million times over that a market that’s earning large profits will draw new entrants like crazy, all of whom will try to earn some of that profit, which stimulates competition and eventually lowers prices and profits to reasonable levels. I firmly believe we need to understand very clearly the causes of market failures we observe before we intervene on them.

I’m also skeptical that she can effectively incentivize pharmaceutical companies to invest in the “drugs we need” when everything else she’s doing is dis-incentivizing pharmaceutical company investments. Again, if drugs that many patients need are not being researched, there must be a reason drug companies are not going after such large potential markets, and I’d hesitate to treat the symptom by offering subsidies for developing specific types of drugs/vaccines before I understand why they’re not already investing in them.

My recommendation: Stick with the plan to have Medicare negotiate like it should be doing already, but don’t impose some artificial price ceiling. Definitely get rid of any artificial price floor though. Take a hard look at patents to see if they should be adjusted. Don’t create uncertainty by threatening to undermine patents and licenses. Have some smart people figure out what’s going on in generic drug markets and solve those problems with smart policies rather than creating a government-run pharmaceutical company. And find out why pharmaceutical companies are not developing as many “drugs we need” as you think they should. If it’s simply because the potential reward is too low, go ahead and offer subsidies to cover part of their investment.

Next Tuesday, I’l look at some of the other main categories of things she talks about in Section 1.

Reading Elizabeth Warren’s Healthcare Plan, Part 1

Having written a fair amount about how to fix healthcare systems lately, I think looking at some current reform proposals will be fun. Maybe a good place to start is with Elizabeth Warren’s Medicare for All proposal–she’s got quite a few details out there.

This will be a two-part series because this week I read through all of her website’s pages that focus on healthcare (here, here, and here) and am really just using this post as my notebook of all the details I could find that are specifically about her vision of the structure of the healthcare system. I ignored all the details about how she would pay for it and how much it would cost (I’ve written about the cost of single-payer recently already). So, what follows is some extensive quoting.

In next week’s post, I’ll give my short summary of what I understand all of that to mean and give my assessment of how it will change the value delivered by our healthcare system over the long term.

  • “Elizabeth supports Medicare for All, which would provide all Americans with a public health care program”
  • “Everybody is covered. Nobody goes broke because of a medical bill.”
  • “Everyone can see the doctor they need. Nobody goes broke. And your doctor gets paid by Medicare instead of fighting with an insurance company.”
  • “allow the Department of Health and Human Services to step in where the market has failed. HHS would manufacture generic drugs in cases in which no company is manufacturing a drug, when only one or two companies manufacture a drug and its price has spiked, when the drug is in shortage, or when a medicine listed as essential by the World Health Organization faces limited competition and high prices”
  • “Medicare should aggressively negotiate with drug companies. We should crack down on rampant abuse of the patent and regulatory system. And we should import drugs from countries that sell the same medicines and meet strong safety standards but that charge their citizens a fraction of our costs.”
  • “hold insurers accountable for providing adequate mental health benefits and ensure Americans receive the protections they are guaranteed by law. She has also worked to hold the Department of Health and Human Services accountable for improving insurers’ compliance with mental health parity laws through an online consumer portal”
  • “invest $100 billion in federal funding over the next ten years in states and communities to fight [the opioid] crisis — because that’s what’s needed to make sure every single person gets the treatment they need. It gives directly to first responders, public health departments, and communities on the front lines of this crisis — so that they have the resources to provide prevention, treatment, and recovery services for those who need it most”
  • “[demand] states use Medicaid to its fullest to tackle the [opioid] crisis, expanding access to medication-assisted treatment, and ensuring treatment programs and recovery residences meet high standards”
  • “create a new Medicare designation for rural hospitals that reimburses them at a higher rate and offers flexibility of services to meet the needs of their communities”
  • “strengthen antitrust protections to fight hospital mergers”
  • “increase funding for Community Health Centers by 15 percent per year over five years and establish a $25 billion dollar capital fund to support a menu of options for improving access to care in health professional shortage areas”
  • “grow the current health workforce in rural communities by lifting the cap on medical residency placements, targeted in underserved areas, by 15,000 over the next five years and increasing the National Health Service Corps and Indian Health Service loan repayment programs to full loan repayment”
  • “Medicare for All is the best way to cover every person in America at the lowest possible cost because it eliminates profiteering from our health care and leverages the power of the federal government to rein in spending”
  • “ensure that Americans have access to all of the coverage they need – not just what for-profit insurance companies are willing to cover – including vision, dental, coverage for mental health and addiction services, physical therapy, and long-term care for themselves and their loved ones”
  • “pursue comprehensive anti-corruption reforms to rein in health insurers and drug companies”
  • “reverse Donald Trump’s sabotage of health care, protect individuals with pre-existing conditions, take on the big pharmaceutical companies to lower costs of key drugs for millions of Americans, and improve the Affordable Care Act, Medicare, and Medicaid”
  • “create a true Medicare for All option that’s free for tens of millions”
  • “give every American over the age of 50 the choice to enter an improved Medicare program, and I’ll give every person in America the choice to get coverage through a true Medicare for All option”
  • Coverage under the new Medicare for All option will be immediately free for children under the age of 18 and for families making at or below 200% of the federal poverty level (about $51,000 for a family of four). For all others, the cost will be modest, and eventually, coverage under this plan will be free for everyone.”
  • “a boost of $100 billion in guaranteed, mandatory spending for new NIH research over the next ten years to radically improve basic medical science and the development of new medical miracles for patients”
  • “fight to pass legislation that would complete the transition to full Medicare for All”
  • “supplemental private insurance that doesn’t duplicate the benefits of Medicare for All would still be available”
  • “I will act immediately to lower the cost of prescription drugs, using every available tool to bring pressure on the big drug companies. I’ll start by taking immediate advantage of existing legal authorities to lower the cost of several specific drugs that tens of millions of Americans rely on.”
  • “bypass [pharmaceutical] patents (while providing “reasonable and entire compensation” to patent holders) using “compulsory licensing authority.””
  • “require re-licensing of certain patents developed with government involvement when the contractor was not alleviating health or safety needs”
  • “fix our broken generic drug market by stepping in to publicly manufacture generic drugs”
  • “launch a full-scale effort to enforce [the mental health parity] requirements”
  • “The Trump administration has abandoned its duty to defend current laws in court, cheering on efforts to destroy protections for pre-existing conditions, insurance coverage for dependents until they’re 26, and the other critical Affordable Care Act benefits. In a Warren administration, the Department of Justice will defend this law. And we will close the loopholes created by the Trump administration, using 1332 waivers, that could allow states to steer healthy people toward parallel, unregulated markets for junk health plans. This will shut down a stealth attack on people with pre-existing conditions who would see their premiums substantially increase as healthier people leave the marketplace. “
  • “The Trump administration has expanded the use of junk health insurance plans as an alternative to comprehensive health plans that meet the standards of the ACA. These plans cover few benefits, discriminate against people with pre-existing conditions, and increase costs for everyone else. And in some cases they direct as much as 50 percent of patient premiums to administrative expenses or profit. I will ban junk plans.”
  • “re-fund the Affordable Care Act programs that help people enroll in ACA coverage”
  • “reverse the Trump administration rule that artificially reduced premium tax credits for many people, making coverage less affordable – and instead will expand these credits”
  • “prohibit restrictive and ineffective [Medicaid] policies like work requirements – which have already booted 18,000 people in Arkansas out of the program – as well as enrollment caps, premiums, drug testing, and limits on retroactive eligibility that can prevent bankruptcy”
  • “reverse the Trump administration’s terrible proposed rule permitting health plans and health providers to discriminate against women, LGBTQ+ people, individuals with limited English proficiency, and others”
  • “roll back the Trump administration’s domestic and global gag rules, which deny Title X and USAID funding to health care providers who provide abortion care or even explain where and how patients can access safe, legal abortions. And I will overturn the Trump administration’s embattled proposed rule to roll back mandatory contraceptive coverage.”
  • “Because of something called the “family glitch,” an entire family can lose access to tax credits that would help them buy health coverage if one parent is offered individual coverage with a premium less than 9.86% of their family income. I’ll work to make sure that a family’s access to tax credits is based on the affordability of coverage for the whole family”
  • “extend eligibility for ACA tax credits to all people who are legally present, including those eligible for the Deferred Action for Childhood Arrivals program”
  • “require employers to pass along the full value of the [medical loss ratio] rebate directly to employees”
  • “expand the medically necessary dental services Medicare can provide”
  • “Medicare payments to [Medicare Advantage] plans for each enrollee are supposed to reflect the cost of covering that person through traditional Medicare, but overwhelming evidence shows that these private plans make their enrollees appear sicker on paper than they actually are to earn inflated payments at the expense of taxpayers. Some suggest that this adds $100 billion or more to Medicare spending over ten years. My administration will put an end to this fraud.”
  • “With the approval of the federal government, states can use Section 1115 demonstration waivers to expand coverage to people who aren’t otherwise eligible for Medicaid. Currently, however, states can only obtain these waivers if projected federal spending under the new program will not be higher than without the waiver. While I pursue legislative reforms to expand coverage, I’ll also change this administrative restriction”
  • “Some states take [Medicaid] coverage away if someone misses just one piece of mail or forgets to notify the state within 10 days of a change in income. These kinds of harsh policies help explain why more than a million children “disappeared” from the Medicaid and CHIP programs in the past year. I will eliminate these kinds of unfair practices, and instead work with states to make it easier for everyone – families, children, and people with disabilities – to maintain this essential coverage.”
  • “roll back the Trump administration’s proposed changes to rules regulating Medicaid managed care plans, which would dilute important standards, such as requiring health plans to maintain adequate provider networks guaranteeing access to care for Medicaid enrollees.”
  • “I will appoint aggressive antitrust enforcers who recognize the problems with hospital and health system consolidation to the Department of Justice and Federal Trade Commission. My administration will also conduct retrospective reviews of significant new mergers, and break up mergers that should never have taken place.”
  • “ramp up the enforcement against information blocking by big hospital systems and health IT companies, and I will appoint leaders to the FTC and DOJ who will conduct a rigorous antitrust investigation of the health records market, especially in the hospital space.”
  • “I view good health plans negotiated through collective bargaining as a positive achievement for working people, and I will seek as part of the first phase of my plan the elimination of the excise tax on those plans.”
  • “fund a true Medicare for All option. The plan will be administered by Medicare and offered on ACA exchanges.”
  • “benefits of the true Medicare for All option will match those in the Medicare for All Act. This includes truly comprehensive coverage for primary and preventive services, pediatric care, emergency services and transportation, vision, dental, audio, long-term care, mental health and substance use, and physical therapy.”
  • “offer coverage at no cost to every kid under the age of 18 and anybody making at or below 200% of the federal poverty level (about $51,000 for a family of four) – including individuals who would currently be on Medicaid, but live in states that refused to expand their programs.”
  • “States will be encouraged to begin paying a maintenance-of-effort to the Medicare for All option in exchange for moving their Medicaid populations into this plan and getting out of the business of administering health insurance. For states that elect to maintain their Medicaid programs, Medicaid premiums and cost sharing will be eliminated, and we will provide wraparound benefits for any Medicare for All option benefits not covered by a state’s program to ensure that these individuals have the same free coverage as Medicaid-eligible people in the Medicare for All option.”
  • “This plan will begin as high-quality public insurance that covers 90% of costs and allows people to utilize improved ACA subsidies to purchase coverage and reduce cost sharing. There will be no premiums for kids under 18 and people at or below 200% of the federal poverty level. For individuals above 200% FPL, premiums will gradually scale as a percentage of income and are capped at 5.0% of their income. Starting in year one, the plan will not have a deductible — meaning everyone gets first dollar coverage, and cost sharing will be zero for people at or below 200% FPL. Cost sharing will scale modestly for individuals at or above that level, with caps on out-of-pocket costs. In subsequent years, premiums and cost sharing for all participants in this plan will gradually decrease to zero.”
  • “The Medicare for All option will have the ability to negotiate for prescription drugs using the mechanisms I’ve previously outlined
  • “Anyone who is uninsured or eligible for free insurance on day one, excluding individuals who are over 50 and eligible for expanded coverage under existing Medicare, will be automatically enrolled in the Medicare for All option. Individuals who prefer other coverage can decline enrollment.”
  • “Workers with employer coverage can opt into the Medicare for All option, at which point their employer will pay an appropriate fee to the government to maintain their responsibility for providing employee coverage. In addition, unions can negotiate to include a move to the Medicare for All option via collective bargaining during the transition period, with unionized employers paying a discounted contribution to the extent that they pass the savings on to workers in the form of increased wages, pensions, or other collectively-bargained benefits.”
  • “I have identified cost reforms that would save our health system trillions of dollars when implemented in a full Medicare for All system. The more limited leverage of a Medicare for All option plan will accordingly limit its ability to achieve these savings – but as more individuals join, this leverage will increase and costs will go down. Provider reimbursement for this plan will start above current Medicare rates for all providers, and be reduced every year as providers’ administrative and delivery costs decrease until they begin to approach the targets in my Medicare for All plan. The size of these adjustments will be governed by overall plan size and the progress of provider adjustment to new, lower rates.”
  • “any person over the age of 50 will be eligible for expanded coverage under the existing Medicare program”
  • “critical benefits like audio, vision, full dental coverage, and long-term care benefits will be added to Medicare, and we will legislate full parity for mental health and substance use services”
  • “Identical to the Medicare program, enrollees will pay premiums in Part B and D, with a $300 cap on drug costs in Part D. Plugging a huge hole in the current Medicare program, out-of-pocket costs will be capped at $1,500 per year across Parts A, B, and D, eliminating deductibles and reducing cost sharing. In subsequent years, premiums and cost sharing will gradually decrease to zero.”
  • “Identical to the Medicare for All option, workers 50-64 can opt into expanded Medicare, at which point their employer will pay an appropriate fee to the government to maintain their responsibility for providing employee coverage.”
  • “The expanded Medicare program will receive the ability to negotiate for prescription drugs using the mechanisms I’ve previously outlined, helping to drive down costs for patients. And we will create a publicly run prescription drug plan that is benchmarked off the best current Part D plan.”
  • “Every person without health insurance over the age of 50 will be automatically enrolled in the expanded existing Medicare program.”
  • “Provider reimbursement for new beneficiaries will start above current Medicare rates for all providers, and be reduced every year as providers’ administrative and delivery costs decrease until they begin to approach the targets in my Medicare for All plan. It will be a new condition of participation that providers who take Medicare or other federally subsidized insurance also take the Medicare for All option. We will also adopt common sense reforms to bring down bloated reimbursement rates, including reforms around post-acute care, bundled payments, and site neutral payments.”
  • “lift the upper limit on eligibility for Premium Tax Credits, allowing people over 400% of the federal poverty level to purchase subsidized coverage”
  • “allow any person or family to receive ACA tax credits and opt into ACA coverage, regardless of whether they have an offer of employer coverage. If an individual currently enrolled in qualifying employer coverage moves into an ACA plan, their employer will pay an appropriate fee to the government to maintain their responsibility for providing employee coverage.”
  • “Right now, people may pay up to 9.86% of their income before they get subsidies. Under my plan, this cap would be lowered – and to make sure those tax credits cover more, we will benchmark them to more generous “gold” plans in the Marketplace. And we will increase eligibility for cost sharing reductions, ensuring that more individuals can get into an affordable exchange plan immediately.”
  • “Right now, if someone’s income goes up, they can be forced to repay thousands of dollars in back premiums. We will change this and base tax credits on the previous year’s income. And if someone’s income goes down, they will get the higher subsidy for that year.”
  • “To help states try out different payer arrangements and pilot programs, we will allow states to receive passthrough funding to expand or improve coverage via the ACA’s Section 1332 waivers. Combined with Medicaid waivers, these changes will allow interested states to start experimenting immediately with consolidating public payers and move towards a single-payer system.”
  • “boost medical research by investing an additional $100 billion in guaranteed, mandatory spending in the NIH over ten years, split between basic science and the creation of a new National Institute for Drug Development that will help take the basic research from the other parts of NIH and turn it into real drugs that patients can use”
  • “invest $100 billion in federal funding over the next ten years in states and communities to fight [the opioid] crisis – providing resources directly to first responders, public health departments, and communities on the front lines of this crisis”
  • “To cut down on time wasted on paperwork, we will create single standardized forms for things like prior authorizations and appeals processes to be used by all insurers (private and public), and we will establish uniform medical billing for insurers and doctors.”
  • “Right now, there are so many middlemen in health care that no one knows for certain how much we pay for different services across the whole system. A centralized repository of de-identified claims data will help the government, researchers, and the market better understand exactly what we pay for health care and what kind of quality it gets us.”
  • “ban non-compete and no-poach agreements and class action waivers across the board, while making it easier for private parties to sue to prevent anti-competitive actions. I’ll work with states to repeal Certificate of Public Advantage, or COPA, statutes that shield health care organizations from federal antitrust review and can lead to the creation of large monopolies with little to no oversight. And I’ll also push to ensure our antitrust laws apply to all health care mergers.”
  • “end the practice of surprise [out-of-network] billing by requiring that services from out-of-network doctors within in-network hospitals, in addition to ambulances or out-of-network hospitals during emergency care, be treated as in-network and paid either prevailing in-network rates or 125% of the Medicare reimbursement rate, whichever is lower”
  • “dramatically scaling up apprenticeship programs to build a health care workforce rooted in the community”
  • “lift the cap on residency placements, allowing 15,000 new clinicians to enter the workforce”
  • “expand the National Health Service Corps and Indian Health Service loan repayment program to allow more health professionals – including physicians, physician assistants, registered nurses, nurse practitioners, and other licensed practitioners – to practice in underserved communities”
  • “provide grants to states that expand scope-of-practice to allow more non-physicians to practice primary care”
  • push to close the mental health provider gap in schools”
  • “fight to pass legislation to complete the transition to the Medicare for All system defined by the Medicare for All Act by the end of my first term in office”
  • “Moving to this system would mean integrating everyone into a unified system with zero premiums, copays, and deductibles”
  • “for unions that seek specialized wraparound coverage and individuals with specialized needs, a private market could still exist”
  • “allow private employer coverage that reflects the outcome of a collective bargaining agreement to be grandfathered into the new system to ensure that these workers receive the full benefit of their bargain before moving to the new system”
  • “Medicare for All will sharply reduce administrative spending and reimburse physicians and other non-hospital providers at current Medicare rates”
  • “rebalance rates in a budget neutral way that increases reimbursements for primary care providers and lowers reimbursements for overpaid specialties
  • “While private insurance companies pay higher rates, this system would be expected to continue compensating providers at roughly the same overall rate that they are currently receiving. Why? This is partially because providers will now get paid Medicare rates for their Medicaid patients – a substantial raise. But it’s also because providers spend an enormous amount of time on billing and interacting with insurance companies that reduces their efficiency and takes away from time with patients.”
  • “reimburse hospitals at an average of 110% of current Medicare rates, with appropriate adjustments for rural hospitals, teaching hospitals, and other care providers with challenging cost structures”
  • “my Medicare for All program maintains these base rate adjustments for geography and other factors. In my plan for Rural America, for example, I have committed to creating a new designation under Medicare for rural hospitals due to the unique challenges health systems face in rural communities. That’s why my plan allows for adjustments above the 110% average rate for certain hospitals, like rural and teaching hospitals, and below this amount for hospitals that are already doing fine with current Medicare rates.”
  • “Today, for example, insurers can charge dramatically different prices for the exact same service based on where the service was performed. Under Medicare for All, providers will receive the same amount for the same procedure”
  • “We can also make adjustments to things that we know Medicare currently pays too much for – like post-acute care – by adjusting those payments down slightly while accounting for the patient’s health status”
  • “We build on the success of value-based reforms enabled by the Affordable Care Act, including by instituting bundled payments for inpatient care and for 90 days of post-acute care.”
  • “Under Medicare for All, hospitals won’t be able to force some patients to pay more because the hospital can’t agree with their insurance company. Instead, because everyone has good insurance, providers will have to compete on better care and reduced wait times in order to attract more patients.”
  • “I will appoint aggressive antitrust enforcers to the Department of Justice and Federal Trade Commission and allow hospitals to voluntarily divest holdings to restore competition to hospital markets. I’ve also previously committed to strengthening FTC oversight over health care organizations, including non-profit hospitals, to crack down on anti-competitive behavior. And I will direct my FTC to block all future hospital mergers unless the merging companies can prove that the newly-merged entity will maintain or improve care.”
  • “Under Medicare for All, the federal government would have real bargaining power to negotiate lower prices for patients. I will adopt an altered version of the mechanism outlined in the Lower Prescription Drug Costs Now Act which leverages excise taxes to bring manufacturers to the table to negotiate prices for both branded and generic drugs, with no drug exceeding 110% of the average international market price, but removes the limit of the number of drugs Medicare can negotiate for and eliminates the “target price” so Medicare could potentially negotiate prices lower than other countries.”
  • “If negotiations fail, I will use two tools – compulsory licensing and public manufacturing – to allow my administration to ensure patient access to medicines by either overriding the patent, as modeled in the Medicare Negotiation and Competitive Licensing Act, or by providing public funds to support manufacturing of these drugs, as modeled in my Affordable Drug Manufacturing Act.”
  • “incentivize pharmaceutical companies to develop the drugs we need – like antibiotics, cancer cures, and vaccines”
  • “Medicare for All covers each patient for their entire lifespan. There’s no perverse incentive to deny the prescriptions they need today because the long-term benefits to their health won’t benefit their current private insurance company”
  • “if [healthcare spending] growth rates exceed this [projected average 10-year GDP growth of 3.9%], I will use available policy tools, which include global budgets, population-based budgets, and automatic rate reductions, to bring it back into line”
  • “Over the next ten years, individuals will spend $11 trillion on health care in the form of premiums, deductibles, copays, and out-of-pocket costs. Under my Medicare for All plan, that amount will drop from $11 trillion to practically zero.”
  • “instead of [American] companies sending those payments to private insurance companies, they would send payments to the federal government for Medicare in the form of an Employer Medicare Contribution.”
  • “People who are self-employed would be exempt from making Employer Medicare Contributions unless they exceed an income threshold.”
  • “Small businesses – companies with under 50 employees – would be exempt from this [Employer Medicare Contributions] requirement too if they aren’t paying for employee health care today. When either new or existing firms exceed this employee threshold, we would phase in a requirement that companies make Employer Medicare Contributions equal to the national average cost of health care per employee for every employee at that company.”
  • “Employers currently offering health benefits under a collective bargaining agreement will be able to reduce their Employer Medicare Contribution if they pass along those savings to workers in the form of increased wages, pensions, or other collectively-bargained benefits. New companies or existing companies who enter into a collective bargaining agreement with their employees after the enactment of Medicare for All will be able to reduce their Employer Medicare Contributions in the same way. Employers can reduce their contribution requirements all the way down to the national average health care cost per employee.”

How Many Health Services Are Actually Shoppable?

Since we’ve just been through Black Friday and Cyber Monday (Cyber Week now?), I thought this would be a fitting topic.

Let me start with the premise of why shopping for healthcare services is important: The only way to sustainably improve the value delivered by healthcare systems is to get people to start choosing higher-value providers and insurance plans. But how many health services are actually shoppable? This is not something I’ve written about before, and it’s because I am not sure of the answer. But here are some beginning thoughts on the topic.

First, I believe all insurance should be shoppable. No, people will not have perfect information about all the quality aspects of the insurance plans, nor will they be able to perfectly predict which cost-sharing arrangements will be cheapest for them, nor are all people mentally equipped to sift through this complex information, but major quality and price differences between different insurance plans should be clear for most people if the shopping experience is well designed.

Health services are another matter. And any effort to quantify the shoppability of health services should be broken down into two analyses:

  1. What percent of services are shoppable?
  2. What percent of spending is attributable to those shoppable services?

The second question is arguably more important if you are concerned with the fiscal stability of countries dealing with runaway healthcare spending. But you can only answer the second question after you answer the first question.

Since I like exhaustive, mutually exclusive categorizations, I enjoyed this breakdown of the first question:

NYC-MKT49701-032_Look into the Future Hospital Price _DTP-01

I’ll point out that they only considered hospital services. But one thing I like is how they considered how commoditized something is (how easy it is to shop for that service because quality is pretty standardized) and accounted for that when predicting how much prices will drop.

If I were to create my own categorization scheme, I would start with an emergent category. Not very many services are actually emergent requiring an ambulance ride straight to the nearest hospital that has capabilities to deal with the issue at hand. A quick thought to my residency days working in ICUs and EDs brings to mind the major things like acute coronary events, strokes, major trauma, sepsis, and acute respiratory failure.

What percent of spending is in this emergency category? It’s tough to calculate because emergency department charges alone don’t account for subsequent hospital care for those medical problems. But this report by the Health Care Cost Institute at least gives a few numbers that could help us ballpark it, and I’d put the total spending on emergencies at around 5-20% of total healthcare spending. Maybe there are better analyses out there on this very thing, but I haven’t seen them.

Once we’ve ruled out the emergent events, we’re left with the other category: everything else. These things could all theoretically be shoppable, but there are some with potentially insurmountable barriers. For example, some services have no easy-to-identify quality metrics (such as ambiguous symptoms requiring a diagnosis–how do you choose the right provider to diagnose that?). And other times, patients are not able to easily predict which services will be needed (such as when an elderly patient with multiple comorbidities goes to the emergency department with shortness of breath).

I could subdivide nonemergent health services into two categories: diagnostic services and treatment services. Per the examples in the prior paragraph, diagnostic services are harder to shop for. Treatment services are typically easier to shop for (like when you know you need a specific surgery). But there are times when the treatment of a condition is not easily separated from the diagnostic efforts. For example, if an orthopedic surgeon diagnoses you with knee osteoarthritis requiring a knee replacement, you typically won’t shop around for the highest-value knee surgeon–you’ll just get the surgery by the doctor who made the diagnosis (not that second opinions are impossible). Or, if you went to a specific hospital’s emergency department and were found to have a heart failure exacerbation requiring hospital admission, you don’t hop on your smartphone and start comparing which hospital can best treat that–you just get admitted to the hospital you’re already in.

So I guess I’m saying that diagnostic efforts are hard to shop for, and treatment efforts that are naturally connected to those diagnostic efforts are also hard to shop for.

How about some numbers? This analysis by the National Institute for Health Care Reform estimates that at least 70% of inpatient spending is shoppable, and 90% of outpatient services are shoppable. But then later they wrote that, when accounting for all potentially shoppable services in our healthcare system, those services account for only about 1/3 of total healthcare spending.

Clearly there is more to learn and discuss about this topic.

A couple parting thoughts: Keep in mind that, regardless of what percent of services or spending is not shoppable, it doesn’t mean we should give up on enabling patients to shop for as much as they are capable of. Getting them to choose higher-value options is still the only long-term solution to improving the value delivered by healthcare systems, as explained in my Healthcare Incentives Framework. And there will likely be a positive externality effect on non-shoppable services when providers up their game on shoppable services.

The Issue of Healthcare CEO Salaries

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Image credit: pnhp.org

When I was an undergrad studying business strategy, people would ask me what business strategy is. I would tell them that someone who studies finance aspires to become a CFO, someone who studies operations aspires to become a COO, someone who studies marketing aspires to become a CMO, and someone who studies strategy aspires to become a CEO.

Defining the business strategy is the job of a CEO. This involves making decisions about what the company will and will not do. It’s deciding how the company will leverage or develop unique capabilities to offer a unique value proposition relative to competitors so that it can achieve a sustainable competitive advantage, which translates into earning greater profits in the long run.

A company’s board of directors is tasked with recruiting and hiring a CEO. This is a tough job. If they choose the wrong person, the company will end up with a losing strategy, and it could cost the company millions in profits. Therefore, they think of this person as an investment. Getting the right person may cost a few million dollars per year, but if spending a few million dollars per year on the right CEO results in the company making tens of millions of dollars more in profit each year, that was a pretty great investment! (FYI, usually the CEO’s base salary is much lower, but they are paid big bonuses for improving profitability.)

What if the board of directors decided that super high CEO salaries were just unethical in healthcare? What if they tried to offer a regular salary when they’re trying to recruit a new CEO? The most unselfish, ungreedy CEO candidate in the world is still motivated by financial incentives, and if they get an offer for $1 million from one board and an offer for $400,000 from another, that’s a hefty difference. They would have to have some very compelling reasons to give up an extra $600,000 per year. I’m sure sometimes that happens, but I doubt the majority of CEO candidates can find enough compelling reasons to forego hundreds of thousands of dollars per year. Heck, if taking a less desirable job means I can retire years earlier and spend more time with my future grandkids, I’d go for it.

So maybe all healthcare companies could decide together that they will pay their CEOs less? This would work out great until a board decides they want a specific candidate really bad because they believe that person will help their company more than any other candidate could. In the face of the decision to keep that truce for the good of everyone or to make the decision that they think is best for their company, they’re going to usually choose what’s best for their company. Therefore, a truce like that would never last. This is exactly what history shows us whenever companies have colluded over any other price–eventually you get defectors because the benefits of becoming the defector (especially the first defector) are so great.

How about having a new law that limits healthcare CEO pay, as was suggested by Steven Brill in his landmark Time article, Bitter Pill? It would be an interesting thing to try. We don’t know for sure what would happen, but we could infer quite a few things from seeing what has happened other times governments have enacted price controls. Without going into all of those, the biggest thing I suspect is that sophisticated companies would find a way around that limit by compensating them in different ways. This article does a good job of showing the complexities of CEO compensation, which I’m sure companies could leverage to find ways around any wage control.

So, with all that context, what do you think about healthcare CEO salaries? If you still say they are ridiculously high and that a world without such vast pay differences would be great, I agree. But let’s move past the ignorant complaints and comparisons that they seem to spark every time the cost of healthcare is brought up.

Yes, Quality Metrics Get Gamed

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Image credit: jewishpress.com

I focus a lot on the importance of getting people simple, relevant quality information to help them compare providers and insurers. But I realize this information will not be perfect. Let me give you an example as it relates to provider quality rankings.

Say there is a hospital that is doing pretty well on the Vizient rankings. They are near the top, but their mortality rate kept them from being the top spot. When the providers at this hospital have their meetings about what should be done to improve their mortality rating, they have two options for how to do that:

  1. Do extensive research into all the patients who died in the hospital in the last year and identify the variety of factors that may have contributed to those deaths, then launch initiatives and processes to eliminate as many of those contributors as possible. There will need to be a lot of research and implementation time spent on this, plus they will need to get buy-in (not easy) to get people to change how care is delivered, or they will possibly need to make changes to their EMR (even harder) to help protect against issues that were identified. The end result will likely be a modest reduction in some of those factors, which may or may not result in actual measurable differences in mortality the next year.
  2. Look at the billing codes providers are putting into the EMR and talk to them about making sure to get all those key codes in place (don’t forget acute metabolic encephalopathy, protein-calorie malnutrition, type II diabetes with complications, or hypokalemia!) so that their overall patient acuity is higher (i.e., more accurately reflects how sick their patients are), so then when their risk adjustment is done the next year to calculate their mortality rating, they will have a big improvement and snag that top spot.

You can see by how I described each option which one is the low-hanging fruit and is also much more likely to result in an improved ranking.

This is not just a theoretical issue–I see it first hand all the time. It happens everywhere. The sad thing to me is not that people who work in hospitals are trying to make their numbers look as good as possible, but that those conversations take up so much meeting time that it crowds out any discussion on how to actually improve the safety and quality of care for patients.

So, yes, quality metrics are not perfect. They have their issues. But I do feel that they generally are successful at revealing large differences in quality between different providers. And that is probably enough to motivate patients to avoid lower-quality options and shift market share to reward higher-value providers.

How I Figure 50% of Healthcare Spending Goes to Administrative Expenses

I got an email this week from my hospital system introducing the team of administrators who are managing the CME (continuing medical education) credit card they give to providers. You see, providers are given an annual stipend that they can only use for CME activities, such as trips to medical conferences, and this is the card we are supposed to use for those expenses. I read the email and looked around to see if anyone else thought it was ludicrous that there is a whole “team” of people dedicated to something like this.

The issue of unnecessarily high administrative expenses in the U.S. healthcare system has been on my mind ever since the recent article in JAMA detailed the “6 waste domains” in our healthcare system and pegged administrative expenses as the biggest one. So, today, I’m going to explain how I calculate administrative expenses in our healthcare system. I believe it’s more intuitive than other approaches because it follows the flow of money through the healthcare system and shows each point where some of the money is siphoned off for administrative expenses. Disclaimer: I’m using nicely rounded numbers and lots of assumptions for the sake of clarity.

Money enters our healthcare system when the patient pays insurance premiums. Let’s say the amount of each dollar paid to an insurer that gets spent on actual care is around 85 cents (their “medical loss”), which means 15 cents goes to administrative expenses in the form of insurance overhead:

 

 

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And then what about the 85 cents that is being paid to healthcare providers? Studies have used reports submitted to Medicare to estimate the percent of hospital revenue that goes to administrative expenses, and they come up with about 25% in the 1990s, but it has been rising. So if we guess that about 29% of those 85 cents paid to hospitals and other facilities goes to administrative expenses (like teams of people managing CME credit cards, plus armies of coders, “revenue cycle managers,” and so many more), that works out to be 25 cents in additional administrative expenses:

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Of the 60 cents left, it’s going to actual care, such as paying caregivers and buying other care-related things like drugs and devices, right? Not so fast. First off, let’s assume about half of that 60 cents goes to drugs and devices (both of which are generally overpriced, but that’s a different subject I’ve written about before). This leaves 30 cents of every healthcare dollar for caregivers. And if 100% of caregivers’ time were devoted to care, we would be dancing and singing every day we go to work. Instead, we spend a great portion of our time on “the system,” dealing with insurance issues, federally mandated trainings, documentation time ensuring billing and diagnostic codes are accurate and thorough, etc. etc. etc. When accounting for all of those factors, it adds up to much more than the estimated 15% of my time dedicated to administrative tasks. I’d peg it closer to 30%. Others would probably say 50%. Things seem to be worse here in the U.S. compared to in the motherland. Anyway, that means roughly 15 cents of every dollar can be attributed to caregiver overhead:

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I will not include in here the additional money providers have to be paid to compensate for the high cost of medical training and malpractice insurance. So, overall, I’m guessing that 50 cents of every dollar that enters the healthcare system goes to non-care things, which we call administrative expenses. Now, this number is very different from the number researchers came up with in the study cited above, which estimated that the overall administrative cost was around 30%, but they’re adding things up differently. That’s fine. We’re counting differently. But the important thing is looking at each of those siphoning points and understanding why they have higher-than-necessary admin costs. I won’t go into detail on that today, but I believe the main factor is the complexity of the system. So. Much. Complexity. We need a simpler healthcare system. I have described a few options here and here. The simplicity we could achieve may come partly by direct efforts to simplify, but I believe it will be more a side-benefit of making the other changes that are necessary in our system.

 

Are Patients Smart Enough to Choose Higher-value Providers and Insurers?

I’ve been hearing the argument lately that healthcare is so complex that patients are incapable of making good decisions. I (mostly) disagree. Here’s how I break this argument down:

Treatment decisions: This is when the patient weighs the different treatment options’ risks and benefits and decides on the one that is right for them. This certainly cannot be done without the assistance of a physician, who needs to simplify those risks and benefits and help clarify which ones are most relevant to the patient. Shared decision making! These decisions are important and determine many aspects of healthcare spending and patient outcomes and satisfaction, but they are not integral to fixing the healthcare system.

Insurance plan decisions: This refers to patients choosing which insurance plan they will get. There are actually usually two rounds of decisions for this. The first-round decision is done by the employer, which narrows down the many options in the region to just a few. Then the employee does the second-round decision of choosing one of those options. A similar process happens with Medicaid in many states–Medicaid contracts with a few different insurers, and the enrollee chooses one. And even Medicare Advantage has a similar two-round decision. Patients need to understand what their likely care expenses will be that year (super tough to predict for many people!) and then choose the plan that seems most likely to cover those care needs with the lowest out-of-pocket spending. And since out-of-pocket spending is a combination of many things (deductible, copays, coinsurance, other alternative payment schemes like reference pricing or multi-tiered networks), this can get pretty complex, and would likely be impossible for a majority of people to easily identify the plan that would be best for them. The two-round decision most people face simplifies this quite a bit by narrowing down the options (at the risk of agency costs), but sometimes there are still too many options. And for those dealing with the open market without a first-round decision narrowing down their options, ways to simplify their selection are an absolute necessity. That’s why I like the idea of dividing plans into different standardized tiers according to their coverage, networks, and out-of-pocket requirements. Software-encoded decision algorithms, which have a patient put in their information and then identify the plan best suited to them, are also great.

Provider decisions: Patients get to choose which providers they go to for care. Lumped in this category is also imaging options (like my experience shopping for an MRI), lab options, and any other medical services they may need. These provider decisions are subject to two rounds of decisions just like insurance plans. The insurer does the first-round decision by narrowing down the provider options (the “in-network providers”), and then the patient typically chooses one of those. What do you need to understand to be able to choose the best provider? I’ve talked about this elsewhere. Patients need simple, salient quality metrics, and they need to know their expected overall out-of-pocket costs. Relatively well-educated people can use well-structured information like that and 80% of them will make the right decision. I don’t know what percent of people with less education can make the right decision when there’s an obvious right answer, but certainly it will be much lower.

So, can patients make good provider and insurer decisions? I believe most of them can if they have the right information and the incentives to consider both cost and quality of the options available to them. It will never be 100%, but that’s okay, because we don’t need 100% of people to make a perfectly rational high-value decision in order to get the changes necessary to start fixing healthcare.